ALBERTSONS COMPANIES, INC. FORWARD-LOOKING STATEMENTS AND FACTORS THAT IMPACT OUR OPERATING RESULTS AND TRENDS
This Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws. The "forward-looking statements" include our current expectations, assumptions, estimates and projections about our business and our industry. They include statements relating to our future operating or financial performance which the Company believes to be reasonable at this time. You can identify forward-looking statements by the use of words such as "outlook," "may," "should," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future" and "intends" and similar expressions which are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict, including, among others: •changes in macroeconomic conditions; •retail consumer behavior and environment and the Company's industry; •ability to attract and retain qualified associates; •failure to achieve productivity initiatives; •increased rates of food price inflation or future deflation; and •factors related to the continued impact of the COVID-19 pandemic, about which there are still many unknowns, including its duration, recurrence, new variants, status and effectiveness of vaccinations, duration and scope of related government orders, financial assistance programs, mandates and regulations and the extent of the overall impact to our business and the communities we serve. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements and risk factors. Forward-looking statements contained in this Form 10-Q reflect our view only as of the date of this Form 10-Q. We undertake no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. While certain aspects of our financial results have been favorably impacted by increased demand during the COVID-19 pandemic, in addition to favorable consumer conditions including incremental financial assistance provided by various government agencies, our business continues to experience challenges to meet customer demand. We have recently experienced increased labor shortages due to recent COVID-19 variants resulting in transportation and retail store disruptions. Together with labor shortages and higher demand for talent, the current economic environment is driving higher wages. The current labor shortages could also impact our ability to negotiate acceptable contracts with labor unions which could result in strikes by affected workers and thereby significantly disrupt our operations. Our ability to meet labor needs, control wage and labor-related costs and minimize labor disruptions will be key to our success of operating our business and executing our business strategies. Furthermore, our business is experiencing an inflationary environment and food price inflation, which has benefited our sales and gross margin growth but has negatively impacted our gross margin rates. In addition, a deflationary market in future periods could reduce sales growth and earnings. We are unable to predict whether the current inflationary environment will continue or whether a deflationary trend will occur. We expect the economic environment to remain uncertain as we navigate the COVID-19 pandemic, labor challenges and the current inflationary environment. Such risks and uncertainties could cause actual results to differ materially from those expressed or forecasted by us. In evaluating our financial results and forward-looking statements, you should carefully consider the risks and uncertainties more fully described in the "Risk Factors" section or other sections in our reports filed with theSEC 20
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including the most recent annual report on Form 10-K and any subsequent periodic reports on Form 10-Q and current reports on Form 8-K.
As used in this Form 10-Q, unless the context otherwise requires, references to "Albertsons," the "Company," "we," "us" and "our" refer toAlbertsons Companies, Inc. and, where appropriate, its subsidiaries.
NON-GAAP FINANCIAL MEASURES
We define EBITDA as generally accepted accounting principles ("GAAP") earnings
(net loss) before interest, income taxes, depreciation and amortization. We
define Adjusted EBITDA as earnings (net loss) before interest, income taxes,
depreciation and amortization, further adjusted to eliminate the effects of
items management does not consider in assessing our ongoing core performance. We
define Adjusted net income as GAAP Net income adjusted to eliminate the effects
of items management does not consider in assessing our ongoing core performance.
We define Adjusted net income per Class A common share as Adjusted net income
divided by the weighted average diluted Class A common shares outstanding, as
adjusted to reflect all restricted stock units ("RSUs") and restricted common
stock ("RSAs") outstanding at the end of the period, as well as the conversion
of Convertible Preferred Stock when it is antidilutive for GAAP. We define Net
Debt as total debt (which includes finance lease obligations and is net of
deferred financing costs and original issue discount) minus unrestricted cash
and cash equivalents and we define Net Debt Ratio as the ratio of Net Debt to
Adjusted EBITDA for the rolling 52 or 53 week period. See "Results of
Operations" for further discussion and a reconciliation of Adjusted EBITDA,
Adjusted net income and Adjusted net income per Class A common share.
EBITDA, Adjusted EBITDA, Adjusted net income and Adjusted net income per Class A
common share (collectively, the "Non-GAAP Measures") are performance measures
that provide supplemental information we believe is useful to analysts and
investors to evaluate our ongoing results of operations, when considered
alongside other GAAP measures such as Net income, operating income and gross
margin. These Non-GAAP Measures exclude the financial impact of items management
does not consider in assessing our ongoing core operating performance, and
thereby provide useful measures to analysts and investors of our operating
performance on a period-to-period basis. Other companies may have different
definitions of Non-GAAP Measures and provide for different adjustments, and
comparability to our results of operations may be impacted by such differences.
We also use Adjusted EBITDA and Net Debt Ratio for board of director and bank
compliance reporting. Our presentation of Non-GAAP Measures should not be
construed as an inference that our future results will be unaffected by unusual
or non-recurring items.
Non-GAAP Measures should not be considered as measures of discretionary cash
available to us to invest in the growth of our business. We compensate for these
limitations by relying primarily on our GAAP results and using Non-GAAP Measures
only for supplemental purposes.
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THIRD QUARTER OF FISCAL 2021 OVERVIEW
In addition to comparisons of the 12 and 40 weeks endedDecember 4, 2021 ("third quarter of fiscal 2021" and "first 40 weeks of fiscal 2021") to the 12 and 40 weeks endedDecember 5, 2020 ("third quarter of fiscal 2020" and "first 40 weeks of fiscal 2020"), given the significant variations that occurred in our business during fiscal 2020 due to the COVID-19 pandemic, we also provide a supplemental comparison of the third quarter of fiscal 2021 and first 40 weeks of fiscal 2021 to the 12 and 40 weeks endedNovember 30, 2019 ("third quarter of fiscal 2019" and "first 40 weeks of fiscal 2019") for certain financial measures to demonstrate the two-year growth in our business. As ofDecember 4, 2021 , we operated 2,278 retail food and drug stores with 1,722 pharmacies, 399 associated fuel centers, 22 dedicated distribution centers and 20 manufacturing facilities. With a strong consumer environment, we continue to make significant progress against all of our strategic priorities, including in-store excellence, accelerating our digital and omnichannel capabilities, increasing productivity and strengthening our talent and culture. Identical sales increased 5.2%, excluding fuel, during the third quarter of fiscal 2021, resulting in two-year stacked identical sales growth of 17.5%. We continue to gain market share in food market on a one and two-year basis, and in the third quarter of fiscal 2021 we also gained market share inMulti Outlet ("MULO") on a one and two-year basis. Food market generally includes traditional supermarkets while MULO includes most food market, drug, mass merchants, club, dollar and military stores that sell food. Our digital initiatives continue to resonate with our customers, underscoring our strong omnichannel capabilities that allow customers to complete their shopping with us in any way they want. During the third quarter of fiscal 2021, digital sales increased 9% compared to the third quarter of fiscal 2020 and 234% on a two-year stacked basis. During the third quarter of fiscal 2021, we expanded our Drive Up & Go curbside pickup service to 1,930 locations and offered delivery services across more than 2,000 of our stores. In our delivery service, we have expanded first party locations, and continue to work with third party services to engage with customers on the platform of their choice. In addition to our continuing partnership with Instacart, we expanded our partnership with DoorDash to offer on-demand grocery delivery service where customers can receive a broad assortment in under one hour. We also recently launched a similar partnership with Uber, where customers can order a full assortment of groceries on the Uber platform. In the just for U loyalty program, ongoing benefit enhancements continued to accelerate membership growth, which increased 17% in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020, reaching 28 million members. Within the program, our retention rate of actively engaged members, those that redeemed fuel or grocery rewards during the third quarter of fiscal 2021, was more than 93%. During the third quarter of fiscal 2021 we continued to roll out our Own Brands across all our banners, generating strong growth as our sales penetration increased by approximately 15 basis points to 25.1% compared to the third quarter of fiscal 2020, with the strongest performance in the floral, deli and food service departments. During the first 40 weeks of fiscal 2021, we have launched 540 new products, including 143 in the third quarter of fiscal 2021, and are on track to launch over 800 items in fiscal 2021. To offset cost inflation and fund future investments, we continue to identify and drive productivity. During the third quarter of fiscal 2021, we have continued to make significant improvements in promotional effectiveness, procurement and supply chain, labor efficiency and shrink. Our capital allocation strategy balances investing for the future, strengthening our balance sheet and returns to shareholders through a combination of dividends and opportunistic share repurchases. Capital expenditures were approximately$1,216 million during the first 40 weeks of fiscal 2021 as we opened nine new stores and completed 146 upgrades and remodels. Our balance sheet remains strong with a Net Debt Ratio of 1.3x as of the end of the third quarter of fiscal 2021. Capital returns to shareholders during the first 40 weeks of fiscal 2021 included our 22
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To enable the delivery of 37 million healthy breakfasts to those in need, we collected$9 million in the third quarter of fiscal 2021 thanks to the generosity of our customers who contributed at our check stands. Another 100,000 meals were provided to those in need with the help of one of our third-party delivery partners atThanksgiving . In addition, we have continued to partner with theDepartment of Health and Human Services and local health authorities to administer COVID-19 vaccines to our local communities and have administered approximately 11 million doses.
Third quarter of fiscal 2021 highlights
In summary, our financial and operating highlights for the third quarter of fiscal 2021 include: •Identical sales increased 5.2%; on a two-year stacked basis identical sales growth was 17.5% •Digital sales increased 9%; on a two-year stacked basis digital sales growth was 234% •Net income of$425 million , or$0.74 per Class A common share •Adjusted net income of$457 million , or$0.79 per Class A common share •Adjusted EBITDA of$1,051 million •Completed 70 remodel projects
Stores
The following table shows stores operating, acquired, opened and closed during
the periods presented:
12 weeks ended 40 weeks ended
December 4, December 5, December 4, December 5,
2021 2020 2021 2020
Stores, beginning of period 2,278 2,252 2,277 2,252
Acquired (1) 2 - 3 -
Opened - 5 6 7
Closed (2) (4) (8) (6)
Stores, end of period 2,278 2,253 2,278 2,253
(1) The 40 weeks ended December 4, 2021 includes one store acquired from Kings
and Balducci's that transferred to us subsequent to the end of the fourth
quarter of fiscal 2020.
The following table summarizes our stores by size:
Number of stores Percent of Total Retail Square Feet (1)
December 4, December 5, December 4, December 5, December 4, December 5,
Square Footage 2021 2020 2021 2020 2021 2020
Less than 30,000 223 202 9.8 % 9.0 % 5.1 4.7
30,000 to 50,000 782 784 34.3 % 34.8 % 32.7 32.9
More than 50,000 1,273 1,267 55.9 % 56.2 % 75.2 74.8
Total Stores 2,278 2,253 100.0 % 100.0 % 113.0 112.4
(1) In millions, reflects total square footage of retail stores operating at the end of the period.
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Table of Contents RESULTS OF OPERATIONS
Comparison of Third Quarter of Fiscal 2021 and First 40 Weeks of Fiscal 2021 to Third Quarter of Fiscal 2020 and First 40 Weeks of Fiscal 2020:
The following tables and related discussion set forth certain information and
comparisons regarding the components of our Condensed Consolidated Statements of
Operations for the third quarter of fiscal 2021 and first 40 weeks of fiscal
2021 to the third quarter of fiscal 2020 and first 40 weeks of fiscal 2020 (in
millions, except per share data).
12 weeks ended
December 4, December 5,
2021 % of Sales 2020 % of Sales
Net sales and other revenue $ 16,728.4 100.0 % $ 15,408.9 100.0 %
Cost of sales 11,898.3 71.1 10,900.3 70.7
Gross margin 4,830.1 28.9 4,508.6 29.3
Selling and administrative expenses 4,243.9 25.4 4,309.1 28.0
Gain on property dispositions and impairment
losses, net (13.4) (0.1) (59.0) (0.4)
Operating income 599.6 3.6 258.5 1.7
Interest expense, net 111.3 0.7 115.9 0.8
Loss on debt extinguishment 3.7 - 8.6 0.1
Other income, net (38.3) (0.2) (19.2) (0.1)
Income before income taxes 522.9 3.1 153.2 0.9
Income tax expense 98.4 0.6 29.5 0.2
Net income $ 424.5 2.5 % $ 123.7 0.7 %
Basic net income per Class A common share $ 0.78 $ 0.21
Diluted net income per Class A common share 0.74 0.20
40 weeks ended
December 4, December 5,
2021 % of Sales 2020 % of Sales
Net sales and other revenue $ 54,503.5 100.0 % $ 53,918.1 100.0 %
Cost of sales 38,765.4 71.1 38,063.1 70.6
Gross margin 15,738.1 28.9 15,855.0 29.4
Selling and administrative expenses 13,978.8 25.6 14,109.7 26.2
Gain on property dispositions and impairment
losses, net (13.3) - (47.0) (0.1)
Operating income 1,772.6 3.3 1,792.3 3.3
Interest expense, net 373.9 0.7 425.1 0.8
Loss on debt extinguishment 3.7 - 57.7 0.1
Other income, net (100.7) (0.2) (27.5) (0.1)
Income before income taxes 1,495.7 2.8 1,337.0 2.5
Income tax expense 331.2 0.6 342.6 0.6
Net income $ 1,164.5 2.2 % $ 994.4 1.9 %
Basic net income per Class A common share $ 1.97 $ 1.78
Diluted net income per Class A common share 1.95 1.71
Net Sales and Other Revenue
Net sales and other revenue increased 8.6% to $16,728.4 million for the third
quarter of fiscal 2021 from $15,408.9 million for the third quarter of fiscal
2020. The increase in Net sales and other revenue was driven by our 5.2%
increase in identical sales, as well as higher fuel sales and sales related to
stores acquired and opened since the third
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quarter of fiscal 2020. Retail price inflation and incremental sales related to administering COVID-19 vaccines contributed to the 5.2% identical sales increase. Net sales and other revenue increased 1.1% to$54,503.5 million for the first 40 weeks of fiscal 2021 from$53,918.1 million for the first 40 weeks of fiscal 2020. The increase in Net sales and other revenue was driven by higher fuel sales and sales related to the stores acquired and opened since the first 40 weeks of fiscal 2020, offset by our 2.3% decrease in identical sales, which was primarily driven by the impact of significantly elevated demand at the onset of the COVID-19 pandemic in the first quarter of fiscal 2020. The decrease in our identical sales for the first 40 weeks of fiscal 2021 was favorably impacted by retail price inflation and incremental sales related to administering COVID-19 vaccines.
Identical Sales, Excluding Fuel
Identical sales include stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis. Direct to consumer digital sales are included in identical sales, and fuel sales are excluded from identical sales. Acquired stores become identical on the one-year anniversary date of the acquisition. Identical sales for the 12 and 40 weeks endedDecember 4, 2021 and the 12 and 40 weeks endedDecember 5, 2020 , respectively, were: 12 weeks ended 40 weeks ended December 4, December 5, December 4, December 5, 2021 2020 2021 2020 Identical sales, excluding fuel 5.2% 12.3% (2.3)% 18.4% Gross Margin Gross margin represents the portion of Net sales and other revenue remaining after deducting Cost of sales during the period, including purchase and distribution costs. These costs include, among other things, purchasing and sourcing costs, inbound freight costs, product quality testing costs, warehouse and distribution costs, Own Brands program costs and digital-related delivery and handling costs. Advertising, promotional expenses and vendor allowances are also components of Cost of sales. Gross margin rate decreased to 28.9% during the third quarter of fiscal 2021 compared to 29.3% during the third quarter of fiscal 2020. Excluding the impact of fuel, gross margin rate increased 10 basis points compared to the third quarter of fiscal 2020. The increase in gross margin rate was primarily due to productivity initiatives, improved pharmacy margins related to administering COVID-19 vaccines and favorable product mix, largely offset by lower gross margin rates across certain product categories due to the rate impact of increased product costs driven by the current inflationary environment, as well as higher supply chain costs. Gross margin rate decreased to 28.9% during the first 40 weeks of fiscal 2021 compared to 29.4% during the first 40 weeks of fiscal 2020. Excluding the impact of fuel, gross margin rate increased five basis points compared to the first 40 weeks of fiscal 2020. The increase in gross margin rate was primarily due to productivity initiatives, improved pharmacy margins related to administering COVID-19 vaccines and favorable product mix, offset by higher supply chain costs, as well as lower gross margin rates driven by the current inflationary environment predominantly experienced in the third quarter of fiscal 2021.
Selling and Administrative Expenses
Selling and administrative expenses consist primarily of store level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices.
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Selling and administrative expenses decreased to 25.4% of Net sales and other revenue during the third quarter of fiscal 2021 compared to 28.0% of Net sales and other revenue during the third quarter of fiscal 2020. Excluding the impact of fuel and the$285.7 million charge related to the withdrawal from theUnited Food and Commercial Workers International Union ("UFCW")Union-Industry Pension Fund ("National Fund ") during the third quarter of fiscal 2020, Selling and administrative expenses as a percentage of Net sales and other revenue decreased 20 basis points. The decrease in Selling and administrative expenses was primarily attributable to lower COVID-19 related expenses and the execution of productivity initiatives, which were offset by higher employee costs, depreciation and other expenses related to our investments in our digital and omnichannel capabilities and other strategic priorities. The increase in employee costs was the result of additional labor to support the increase in fresh sales, market-driven wage rate increases, and higher equity-based compensation expense. Selling and administrative expenses decreased to 25.6% of Net sales and other revenue during the first 40 weeks of fiscal 2021 compared to 26.2% of Net sales and other revenue for the first 40 weeks of fiscal 2020. Excluding the impact of fuel and the$285.7 million charge related to the withdrawal from theUFCW National Fund during the third quarter of fiscal 2020, Selling and administrative expenses as a percentage of Net sales and other revenue increased 60 basis points during the first 40 weeks of fiscal 2021 compared to the first 40 weeks of fiscal 2020. The increase in Selling and administrative expenses as a percentage of Net sales and other revenue was primarily attributable to higher employee costs, depreciation and other expenses related to our investments in our digital and omnichannel capabilities and other strategic priorities. The increase in employee costs was the result of additional labor to support the increase in fresh sales, market-driven wage rate increases and higher equity-based compensation expense. These increases were partially offset by lower COVID-19 related costs and execution of productivity initiatives.
Gain on Property Dispositions and Impairment Losses, Net
For the third quarter of fiscal 2021, net gain on property dispositions and impairment losses was$13.4 million , primarily driven by$15.8 million of gains from the sale of assets, partially offset by$2.4 million of asset impairments, primarily related to right-of-use assets. For the third quarter of fiscal 2020, net gain on property dispositions and impairment losses was$59.0 million , primarily driven by$62.9 million of gains from the sale of assets, partially offset by$3.9 million of asset impairments. For the first 40 weeks of fiscal 2021, net gain on property dispositions and impairment losses was$13.3 million , primarily driven by$31.6 million of gains from the sale of assets, partially offset by$18.3 million of asset impairments, primarily related to right-of-use assets and intangible assets. For the first 40 weeks of fiscal 2020, net gain on property dispositions and impairment losses was$47.0 million , primarily driven by$73.6 million of gains from the sale of assets, partially offset by$26.6 million of asset impairments, primarily related to right-of-use assets.
Interest Expense, Net
Interest expense, net was$111.3 million during the third quarter of fiscal 2021 compared to$115.9 million during the third quarter of fiscal 2020. The decrease in interest expense was primarily attributable to lower average outstanding borrowings and lower average interest rates. The weighted average interest rate during the third quarter of fiscal 2021 was 5.4%, excluding deferred financing costs and original issue discount, compared to 5.5% during the third quarter of fiscal 2020. Interest expense, net was$373.9 million during the first 40 weeks of fiscal 2021 compared to$425.1 million during the first 40 weeks of fiscal 2020. The decrease in interest expense was primarily attributable to lower average outstanding borrowings and lower average interest rates. The weighted average interest rate during the first 40 weeks of fiscal 2021 was 5.5%, excluding deferred financing costs and original issue discount, compared to 5.9% during the first 40 weeks of fiscal 2020. 26
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Table of Contents Loss on Debt Extinguishment Loss on debt extinguishment was$3.7 million during both the third quarter of fiscal 2021 and first 40 weeks of fiscal 2021, compared to loss on debt extinguishment of$8.6 million during the third quarter of fiscal 2020 and$57.7 million during the first 40 weeks of fiscal 2020. The loss on debt extinguishment during the third quarter and first 40 weeks of fiscal 2021 primarily consisted of a make-whole premium and write-off of deferred financing costs associated with the redemption of our 5.750% Senior Unsecured Notes due 2025 (the "2025 Notes"). The loss on debt extinguishment during the third quarter and first 40 weeks of fiscal 2020 primarily consisted of a redemption premium payment and write-off of debt discounts associated with the redemption of our 6.625% Senior Unsecured Notes due 2024 (the "2024 Notes") and partial redemption of our 2025 Notes.
Other Income, Net
For the third quarter of fiscal 2021, Other income, net was$38.3 million compared to$19.2 million for the third quarter of fiscal 2020. Other income, net during the third quarter of fiscal 2021 was primarily driven by non-service cost components of net pension and post-retirement expense, unrealized gains from non-operating investments and income related to our equity investment. Other income, net during the third quarter of fiscal 2020 was primarily driven by non-service cost components of net pension and post-retirement expense and income related to our equity investment. For the first 40 weeks of fiscal 2021, Other income, net was$100.7 million compared to$27.5 million for the first 40 weeks of fiscal 2020. Other income, net during the first 40 weeks of fiscal 2021 was primarily driven by non-service cost components of net pension and post-retirement expense, realized and unrealized gains from non-operating investments and income related to our equity investment, partially offset by unrealized losses from non-operating investments. Other income, net during the first 40 weeks of fiscal 2020 was primarily driven by non-service cost components of net pension and post-retirement expense and income related to our equity investment, partially offset by recognized losses on interest rate swaps.
Income Taxes
Income tax expense was$98.4 million , representing a 18.8% effective tax rate, for the third quarter of fiscal 2021. Income tax expense was$29.5 million , representing a 19.3% effective tax rate, for the third quarter of fiscal 2020. The decrease in the effective income tax rate was primarily driven by incremental discrete state income tax benefits related to expired statutes and audit settlements during the third quarter of fiscal 2021. Income tax expense was$331.2 million , representing a 22.1% effective tax rate, for the first 40 weeks of fiscal 2021. Income tax expense was$342.6 million , representing a 25.6% effective tax rate, for the first 40 weeks of fiscal 2020. The decrease in the effective income tax rate was primarily driven by the recognition of discrete state income tax benefits during the first 40 weeks of fiscal 2021 and certain nondeductible transaction-related costs incurred during the first 40 weeks of fiscal 2020.
We currently expect our annual effective tax rate for fiscal 2021 to be in the range of approximately 22.5% to 23.5%.
Net Income and Adjusted Net Income
Net income was$424.5 million , or$0.74 per Class A common share, during the third quarter of fiscal 2021 compared to$123.7 million , or$0.20 per Class A common share, during the third quarter of fiscal 2020. Adjusted net income was$457.2 million , or$0.79 per Class A common share, during the third quarter of fiscal 2021 compared to$386.6 million , or$0.66 per Class A common share, during the third quarter of fiscal 2020. 27
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Net income was$1,164.5 million , or$1.95 per Class A common share, during the first 40 weeks of fiscal 2021 compared to$994.4 , or$1.71 per Class A common share, during the first 40 weeks of fiscal 2020. Adjusted net income was$1,344.2 million , or$2.32 per Class A common share, during the first 40 weeks of fiscal 2021 compared to$1,544.2 million , or$2.62 per Class A common share, during the first 40 weeks of fiscal 2020.
Adjusted EBITDA
For the third quarter of fiscal 2021, Adjusted EBITDA was$1,051.2 million , or 6.3% of Net sales and other revenue, compared to$967.7 million , or 6.3% of Net sales and other revenue, for the third quarter of fiscal 2020. For the first 40 weeks of fiscal 2021, Adjusted EBITDA was$3,324.7 million , or 6.1% of Net sales and other revenue, compared to$3,607.1 million , or 6.7% of Net sales and other revenue for the first 40 weeks of fiscal 2020. Supplemental Two-Year Results - Comparison of Third Quarter of Fiscal 2021 and First 40 Weeks of Fiscal 2021 to Third Quarter of Fiscal 2019 and First 40 Weeks of Fiscal 2019 The following table provides a comparison of the third quarter of fiscal 2021 and first 40 weeks of fiscal 2021 to the third quarter of fiscal 2019 and first 40 weeks of fiscal 2019 for certain financial measures, including a compounded annual growth rate ("CAGR"), to demonstrate the two-year growth in our business. We believe these supplemental comparisons provide meaningful and useful information to investors about the trends in our business relative to pre-COVID-19 pandemic periods. These comparisons should not be reviewed in isolation or considered substitutes for our financial results included elsewhere in this Form 10-Q. Third Quarter of Fiscal 2021 First 40 Weeks of Fiscal 2021 Supplemental Two-Year Results Supplemental Two-Year Results Identical sales two-year stacked (1) 17.5 % 16.1 % Net income per Class A common share two-year CAGR 186.7 % 68.1 % Adjusted net income per Class A common share two-year CAGR 81.4 % 80.8 % Net income two-year CAGR 178.3 % 70.9 % Adjusted net income two-year CAGR 79.3 % 79.3 % Adjusted EBITDA two-year CAGR 28.7 % 26.5 % % of net sales and other revenue: Gross margin (1) Increased 40 basis points Increased 75 basis points Selling and administrative expenses (1) Decreased 170 basis points Decreased 120 basis points (1) Excluding fuel.Net Sales and Other Revenue Net sales and other revenue was$16.7 billion during the third quarter of fiscal 2021 compared to$14.1 billion during the third quarter of fiscal 2019. Net sales and other revenue was$54.5 billion during the first 40 weeks of fiscal 2021 compared to$47.0 billion during the first 40 weeks of fiscal 2019. The increase in sales compared to the third quarter of fiscal 2019 and the first 40 weeks of fiscal 2019 was primarily due to the 17.5% and 16.1% increase, respectively, in two-year stacked identical sales.
Gross Margin
Gross margin rate increased to 28.9% during the third quarter of fiscal 2021
compared to 28.3% during the third quarter of fiscal 2019. Gross margin rate
increased to 28.9% during the first 40 weeks of fiscal 2021 compared to 28.0%
during the first 40 weeks of fiscal 2019. Excluding the impact of fuel, gross
margin rate increased by
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approximately 40 and 75 basis points, respectively, compared to the third quarter of fiscal 2019 and first 40 weeks of fiscal 2019 primarily driven by sales leverage, productivity initiatives and improved pharmacy margins related to administering COVID-19 vaccines, partially offset by growth in digital sales and an increase in product and supply chain costs driven by the current inflationary environment.
Selling and Administrative Expenses
Selling and administrative expenses decreased to 25.4% of Net sales and other
revenue during the third quarter of fiscal 2021 compared to 27.0% of Net sales
and other revenue for the third quarter of fiscal 2019. Selling and
administrative expenses decreased to 25.6% of Net sales and other revenue during
the first 40 weeks of fiscal 2021 compared to 26.7% of sales for the first 40
weeks of fiscal 2019. Excluding the impact of fuel, selling and administrative
expenses as a percentage of Net sales and other revenue decreased approximately
170 and 120 basis points, respectively, compared to the third quarter of fiscal
2019 and first 40 weeks of fiscal 2019, primarily due to sales leverage and the
execution of productivity initiatives, partially offset by increases in employee
costs and other expenses related to our investments in our digital and
omnichannel capabilities and strategic priorities, as well as incremental
COVID-19 expenses.
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Reconciliation of Non-GAAP Measures
The following tables reconcile Net income to Adjusted net income, and Net income
per Class A common share to Adjusted net income per Class A common share (in
millions, except per share data):
12 weeks ended
December 4, December 5, November 30, 2019
2021 2020 Supplemental
Numerator:
Net income $ 424.5 $ 123.7 $ 54.8
Adjustments:(Gain) loss on interest rate and commodity hedges, net (d)
(1.3) (1.9) 0.1
Facility closures and transformation (1)(b) 10.2 18.6 11.0
Acquisition and integration costs (2)(b) 1.2 2.0 17.4
Equity-based compensation expense (b) 26.4 15.1 7.2
Gain on property dispositions and impairment losses, net
(13.4) (59.0) (18.7)
LIFO expense (a) 29.5 14.3 2.6
Discretionary COVID-19 pandemic related costs (3)(b) - 44.7 -
Government-mandated incremental COVID-19 pandemic
related pay (4)(b) 5.6 - -
Transaction and reorganization costs related to
Convertible Preferred Stock issuance and initial
public offering (b) - (1.0) 3.4
Amortization of debt discount and deferred financing costs (c)
4.8 4.9 25.1
Loss on debt extinguishment 3.7 8.6 -
Amortization of intangible assets resulting from
acquisitions (b) 9.5 12.9 65.3
UFCW National Fund withdrawal (b) - 285.7 -
Miscellaneous adjustments (5)(f) (34.9) 8.6 4.6
Tax impact of adjustments to Adjusted net income (8.6) (90.6) (30.6)
Adjusted net income $ 457.2 $ 386.6 $ 142.2
Denominator:
Weighted average Class A common shares outstanding - diluted
574.2 472.1 580.9
Adjustments:
Convertible Preferred Stock (6) - 101.6 - Restricted stock units and awards (7) 6.5 8.9 6.6 Adjusted weighted average Class A common shares outstanding - diluted 580.7 582.6 587.5
Adjusted net income per Class A common share - diluted
0.24
Supplemental Two-Year CAGR:
Net income two-year CAGR 178.3 %
Adjusted net income two-year CAGR 79.3 %
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12 weeks ended
December 4, December 5, November 30, 2019
2021 2020 Supplemental
Net income per Class A common share - diluted
0.20 $ 0.09 Convertible Preferred Stock (6) - 0.01 - Non-GAAP adjustments (8) 0.06 0.46 0.15 Restricted stock units and awards (7) (0.01) (0.01) - Adjusted net income per Class A common share - diluted$ 0.79 $ 0.66 $ 0.24 Supplemental Two-Year CAGR: Net income per Class A common share two-year CAGR 186.7 % Adjusted net income per Class A common share two-year CAGR 81.4 % The following table is a reconciliation of Adjusted net income to Adjusted EBITDA: 12 weeks ended December 4, December 5, November 30, 2019 2021 2020 Supplemental Adjusted net income (9)$ 457.2 $ 386.6 $ 142.2 Tax impact of adjustments to Adjusted net income 8.6 90.6 30.6 Income tax expense 98.4 29.5 12.9 Amortization of debt discount and deferred financing costs (c) (4.8) (4.9) (25.1) Interest expense, net 111.3 115.9 154.8 Amortization of intangible assets resulting from acquisitions (b) (9.5) (12.9) (65.3) Depreciation and amortization (e) 390.0 362.9 384.3 Adjusted EBITDA$ 1,051.2 $ 967.7 $ 634.4 Supplemental Two-Year CAGR: Adjusted EBITDA two-year CAGR 28.7 % (1) Includes costs related to closures of operating facilities and third-party consulting fees related to our strategic priorities and associated business transformation. (2) Related to conversion activities and related costs associated with integrating acquired businesses. Also includes expenses related to management fees in prior periods paid in connection with acquisition and financing activities. (3) Includes$44.7 million in bonus payments related to front-line associates during the third quarter of fiscal 2020. (4) Represents incremental pay that is legislatively required in certain municipalities in which we operate. (5) Miscellaneous adjustments include the following (see table below): 12 weeks ended December 4, December 5, November 30, 2019 2021 2020 Supplemental Non-cash lease-related adjustments$ 2.4 $ 1.2 $ 7.0 Lease and lease-related costs for surplus and closed stores 5.8 8.8 4.5 Net realized and unrealized (gain) loss on non-operating investments (22.0) (3.5) (10.0) Certain legal and regulatory accruals and settlements, net (23.8) - 0.1 Other (i) 2.7 2.1 3.0 Total miscellaneous adjustments$ (34.9) $ 8.6 $ 4.6 (i) Primarily includes adjustments for unconsolidated equity investments and certain contract termination costs. (6) Represents the conversion of Convertible Preferred Stock to the fully outstanding as-converted Class A common shares as of the end of each respective period, for periods in which the Convertible Preferred Stock is antidilutive under GAAP. 31
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(7) Represents incremental unvested RSUs and unvested RSAs to adjust the diluted
weighted average Class A common shares outstanding during each respective period
to the fully outstanding RSUs and RSAs as of the end of each respective period.
(8) Reflects the per share impact of Non-GAAP adjustments for each period. See
the reconciliation of Net income to Adjusted net income above for further
details.
(9) See the reconciliation of Net income to Adjusted net income above for
further details.
Non-GAAP adjustment classifications within the Consolidated Statement of
Operations:
(a) Cost of sales
(b) Selling and administrative expenses
(c) Interest expense, net
(d) (Gain) loss on interest rate and commodity hedges, net:
12 weeks ended
December 4, December 5, November 30, 2019
2021 2020 Supplemental
Cost of sales $ (0.6) $ (2.2) $ 0.1
Other income, net (0.7) 0.3 -
Total (Gain) loss on interest rate and
commodity hedges, net $ (1.3) $ (1.9) $ 0.1
(e) Depreciation and amortization:
12 weeks ended
December 4, December 5, November 30, 2019
2021 2020 Supplemental
Cost of sales $ 38.8 $ 37.8 $ 38.3
Selling and administrative expenses 351.2 325.1 346.0
Total Depreciation and amortization
384.3
(f) Miscellaneous adjustments:
12 weeks ended
December 4, December 5, November 30, 2019
2021 2020 Supplemental
Selling and administrative expenses
11.9
Other income, net (19.7) (1.4) (7.3)
Total Miscellaneous adjustments
4.6
32
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40 weeks ended
December 4, December 5, November 30, 2019
2021 2020 Supplemental
Numerator:
Net income $ 1,164.5 $ 994.4 $ 398.6
Adjustments:(Gain) loss on interest rate and commodity hedges, net (d)
(8.8) 24.0 0.4
Facility closures and transformation (1)(b) 45.8 34.5 11.0
Acquisition and integration costs (2)(b) 8.1 10.5 51.0
Equity-based compensation expense (b) 75.4 43.4 24.8
Gain on property dispositions and impairment losses, net (3)
(13.3) (47.0) (482.7)
LIFO expense (a) 58.6 37.5 18.9
Discretionary COVID-19 pandemic related costs (4)(b) - 134.6 -
Government-mandated incremental COVID-19 pandemic
related pay (5)(b) 53.0 - -
Civil disruption related costs (6)(b) - 13.0 -
Transaction and reorganization costs related to
Convertible Preferred Stock issuance and initial
public offering (b) - 23.4 3.4
Amortization of debt discount and deferred financing costs (c)
15.9 16.1 68.9
Loss on debt extinguishment 3.7 57.7 65.8
Amortization of intangible assets resulting from
acquisitions (b) 37.1 43.5 227.0
UFCW National Fund withdrawal (b) - 285.7 -
Miscellaneous adjustments (7)(f) (40.6) 56.0 37.7
Tax impact of adjustments to Adjusted net income (55.2) (183.1) (6.9)
Adjusted net income $ 1,344.2 $ 1,544.2 $ 417.9
Denominator:
Weighted average Class A common shares outstanding - diluted
471.2 580.3 579.8
Adjustments:
Convertible Preferred Stock (8) 101.6 - - Restricted stock units and awards (9) 7.3 8.3 7.6 Adjusted weighted average Class A common shares outstanding - diluted 580.1 588.6 587.4
Adjusted net income per Class A common share - diluted
0.71
Supplemental Two-Year CAGR:
Net income two-year CAGR 70.9 %
Adjusted net income two-year CAGR 79.3 %
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40 weeks ended
December 4, December 5, November 30, 2019
2021 2020 Supplemental
Net income per Class A common share - diluted
1.71 $ 0.69 Convertible Preferred Stock (8) 0.09 - - Non-GAAP adjustments (10) 0.31 0.95 0.03 Restricted stock units and awards (9) (0.03) (0.04) (0.01) Adjusted net income per Class A common share - diluted$ 2.32 $ 2.62 $ 0.71 Supplemental Two-Year CAGR: Net income per Class A common share two-year CAGR 68.1 % Adjusted net income per Class A common share two-year CAGR 80.8 % The following table is a reconciliation of Adjusted net income to Adjusted EBITDA: 40 weeks ended December 4, December 5, November 30, 2019 2021 2020 Supplemental Adjusted net income (11)$ 1,344.2 $ 1,544.2 $ 417.9 Tax impact of adjustments to Adjusted net income 55.2 183.1 6.9 Income tax expense 331.2 342.6 110.5 Amortization of debt discount and deferred financing costs (c) (15.9) (16.1) (68.9) Interest expense, net 373.9 425.1 557.5 Amortization of intangible assets resulting from acquisitions (b) (37.1) (43.5) (227.0) Depreciation and amortization (e) 1,273.2 1,171.7 1,281.9 Adjusted EBITDA$ 3,324.7 $
3,607.1 $ 2,078.8
Supplemental Two-Year CAGR: Adjusted EBITDA two-year CAGR 26.5 % (1) Includes costs related to closures of operating facilities and third-party consulting fees related to our strategic priorities and associated business transformation. (2) Related to conversion activities and related costs associated with integrating acquired businesses. Also includes expenses related to management fees in prior periods paid in connection with acquisition and financing activities. (3) Primarily due to gains related to sale leaseback transactions in the second quarter of fiscal 2019. (4) Includes$44.7 million in bonus payments related to front-line associates during the third quarter of fiscal 2020. Also includes$53 million of charitable contributions to our communities for hunger relief and$36.9 million in final reward payments to front-line associates at the end of the first quarter of fiscal 2020. (5) Represents incremental pay that is legislatively required in certain municipalities in which we operate. (6) Primarily includes costs related to store damage, inventory losses and community support as a result of the civil disruption during lateMay 2020 and earlyJune 2020 in certain markets. 34
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(7) Miscellaneous adjustments include the following (see table below):
40 weeks ended
December 4, December 5, November 30, 2019
2021 2020 Supplemental
Non-cash lease-related adjustments $ 5.5 $ 3.1 $ 13.3
Lease and lease-related costs for surplus and
closed stores 22.5 38.3 16.5
Net realized and unrealized (gain) loss on
non-operating investments (31.7) 1.2 (2.5)
Certain legal and regulatory accruals and
settlements, net (27.9) - (1.8)
Other (i) (9.0) 13.4 12.2
Total miscellaneous adjustments $ (40.6) $ 56.0 $ 37.7
(i) Primarily includes adjustments for pension settlement gain, unconsolidated
equity investments and certain contract termination costs.
(8) Represents the conversion of Convertible Preferred Stock to the fully
outstanding as-converted Class A common shares as of the end of each respective
period, for periods in which the Convertible Preferred Stock is antidilutive
under GAAP.
(9) Represents incremental unvested RSUs and unvested RSAs to adjust the diluted
weighted average Class A common shares outstanding during each respective period
to the fully outstanding RSUs and RSAs as of the end of each respective period.
(10) Reflects the per share impact of Non-GAAP adjustments for each period. See
the reconciliation of Net income to Adjusted net income above for further
details.
(11) See the reconciliation of Net income to Adjusted net income above for
further details.
Non-GAAP adjustment classifications within the Consolidated Statement of
Operations:
(a) Cost of sales
(b) Selling and administrative expenses
(c) Interest expense, net
(d) (Gain) loss on interest rate and commodity hedges, net:
40 weeks ended
December 4, December 5, November 30, 2019
2021 2020 Supplemental
Cost of sales $ (8.4) $ 4.3 $ 0.4
Other income, net (0.4) 19.7 -
Total (Gain) loss on interest rate and
commodity hedges, net $ (8.8) $ 24.0 $ 0.4
(e) Depreciation and amortization:
40 weeks ended
December 4, December 5, November 30, 2019
2021 2020 Supplemental
Cost of sales $ 125.6 $ 131.9 $ 128.3
Selling and administrative expenses 1,147.6 1,039.8 1,153.6
Total Depreciation and amortization
(f) Miscellaneous adjustments:
40 weeks ended
December 4, December 5, November 30, 2019
2021 2020 Supplemental
Selling and administrative expenses
28.6
Other income, net (35.6) 11.3 9.1
Total Miscellaneous adjustments
37.7
35
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